This page offers a description of common business entity types available in Delaware. Read through each type or select from the following list for quick access:
Limited Liability Companies (or LLCs)
The limited liability company (“LLC” or “company”) provides limited liability to all of its members, regardless of title or their participation in management. This means that no member is personally liable for the debts and liabilities of the company; the most anyone can lose is their investment. The LLC is the most popular business entity in Delaware, surpassing the corporation. In 2019, for example, LLCs accounted for roughly
73% of all entities formed in Delaware, compared to corporations’ showing at 20%.
The Operating Agreement and Flexible Terms
An LLC’s
operating agreement governs its operation, management, distributions of profits, members’ rights and obligations, and other terms. These terms can be customized to the specific deal among the members with very few limitations. The operating agreement can even modify or eliminate fiduciary duties that the members may owe the company and other members. When an operating agreement does not cover a key term, Delaware law provides default provisions to fill the gap. An LLC’s versatility is at the heart of its advantage and popularity, with Delaware law expressly stating that the LLC form is intended to give "maximum effect to the principle of freedom of contract[.]"
[source: Delaware Limited Liability Company Act, 6 DE Code § 18-1101(b) (2018).]
Flexibility can be as confusing as it is useful. A key
benefit of forming a business in Delaware is its large body of case law. This case law allows officers and directors to follow clear precedent in seeking to act in accordance with their fiduciary duties under a wide array of circumstances. However, an LLC’s operating agreement will often use terms and language that has not been interpreted by a large body of cases. The LLC and its members lose the benefit of predictability that Delaware’s body of case law provides.
Options for Management of an LLC
An LLC can be managed by its members (as] a whole or through a board of members), one or more “managing members”, or a third-party manager. As with other terms, the powers of management and its ability to act without shareholder consent are set forth in the operating agreement. If a company is managed by a third-party, it will generally have a separate management agreement with that entity. In many cases, an LLC will take on features of a corporate structure. For example, a company may set up a managing board of members (akin to directors) and issue resolutions to document decisions, provide authorizations, and memorialize decision-making.
An LLC can have a single member and still provide him or her with limited liability (i.e., only the member’s investment can be lost). If the member does not treat the company and its assets as separate from those of the member, however, a court may look through the company and impose the liabilities of the LLC on the single member. Looking through a corporation or LLC to impose the entity’s debts and liabilities on one or more members is referred to as piercing the veil.
Ownership Interests
An LLC does not issue stock. Instead, members hold ownership interests in the company expressed as a percentage (although some LLCs express ownership in terms of units for administrative purposes). The LLC may issue membership interests of various classes having such varying voting, economic, or other rights as the members desire.
Taxation
Generally, an LLC is taxed on a pass-through basis unless it elects otherwise with the Internal Revenue Service (IRS). Under pass-through taxation, the LLC is not taxed., so that the members generally must each claim on their taxes their distributive share of the profits and losses of the entity, even if such amounts were not distributed (referred to as “phantom income” which is often addressed through distributions meant only to satisfy tax liability on income not actually received).
An LLC is not the ideal choice for a start-up company that expects to raise multiple rounds of
venture capital, as many sophisticated investors will not invest in LLCs because of the complexities created by the company’s pass-through tax treatment for such investors, among other things. Preparing a K-1 and other materials required to be distributed by an LLC with a large number of investors can also be a logistical nightmare for the entity. An LLC is commonly used in launching private investment funds, however, although some investors still cling, often without knowing why beyond custom and familiarity, to the limited partnership form for a fund.
Formation and Franchise Tax
An LLC is created by filing a very simple
Certificate of Formation with the State. The LLC’s operating agreement and membership information, including the identity of members, are not filed with the State and are not publicly available. An LLC is required to pay the State a flat $300 franchise tax
by June 1 of each year (which Harvard Business Services assists its LLC clients in both remembering and paying), rather than the variable franchise tax payable by corporations.
Series Limited Liability Companies
If you are considering using a Series LLC, we recommend you consult with counsel to fully understand the features and legal status of the Series LLC, as well as issues in operating a Series LLC (and its series) and your anticipated business or industry. Series LLCs are most commonly used for holding separate assets (such as real estate or valuable material assets), in providing for separate single-investment pooled vehicles (particularly through crowdfunding portals online), and in some private funds.
Series Structure
The series LLC (“Series LLC”) is a single LLC that can create within itself separate and distinct “series,” each of which (1) can hold its own assets, take on its own debts and liabilities, have its own distinct members and management, sue and be sued in its own name, and pursue its own business lines, (2) is taxed separately, receiving pass-through treatment unless it elects otherwise, and (3) is effectively treated as an individual LLC relative to other series, such that the debts and liabilities of a series are enforceable against that series’ assets only, and not against the assets of the Series LLC generally or any other series.
Protected Versus Registered Series
Series may be formed as
protected series or registered series. Registered series, which only codified in the Limited Liability Company Act in 2019, are created through a filing with the State, and can obtain a certificate of good standing in their own name. Certain language applicable to registered series in the Delaware Limited Liability Company Act specifically addresses issues that were formerly unclear in the series context, making clear that a series can file for bankruptcy individually and a security interest in membership interests of a registered series can be “perfected” by lenders to a member. It is easier to obtain a bank account with a registered series given its normal LLC-like documentation from the State (evidence of formation, good standing, etc.).
Protected series represent the only series that were available prior to August 2019, when Delaware law was amended to provide for registered series. Protected series are created through an internal resolution of the Series LLC, and are less formally documented. There is no State filing required to form a protected series, a protected series cannot obtain a good standing certificate in its own name, and the clarifications regarding series that make registered series a welcome development do not technically apply to protected series; however, a protected series is not required to pay an annual franchise tax.
Operating Agreement and Series Supplements
The Series LLC itself is governed by an
operating agreement, which provides for, among other things, the creation and maintenance of series, and each series should similarly be governed by its own supplemental governing document. As with the standard LLC, the operating agreement for the Series LLC and each series can specifically define the relationship among the parties and the terms governing the operation of the Series LLC or series, as applicable.
Rights of Members’ Creditors
It is unclear whether the benefits of a charging order as the sole remedy for a series member’s own creditors applies in the context of a series. For a discussion of that concept, see the description of an LLC or an LP.
Formation and Franchise Tax
A Series LLC is created by filing a Certificate of Formation with the State containing certain specific, series-related language. The Series LLC is required to pay the State a flat $300 franchise tax each year, rather than the variable franchise tax payable by corporations. A registered series, as noted above, is created by filing a Certificate of Registered Series with the State. A registered series is required to pay an annual tax of $75 each year. A protected series, however, is not required to make a filing with the State and does not pay an annual tax.
The
public benefit LLC is a relatively new business form. It functions and is structured like an LLC, however it includes in its Certificate of Formation a statement of a specific benefit purpose that it intends to pursue in addition to its for-profit business activity. Such a public benefit might include, for example, “expanding access to quality internet access in rural or disadvantaged communities,” or “improving the nutritional value of school lunches in X state.”
Management and Public Benefit Features
The management options and flexibility of the LLC form apply with equal force to the public benefit LLC, as does the description of the membership interests issued by a public benefit LLC.
One of the key differences is that, in managing a public benefit LLC, management is able to balance the interests of the environment and society, the entity’s specific “benefit” purpose, and maximizing members’ return without violating their fiduciary duty to the entity and its members (to the extent such fiduciary duties have not been eliminated in the operating agreement).
Management of a public benefit LLC is not liable to anyone for the public benefit purpose (e.g., no one can sue and claim the director made a decision against the stated public benefit or can sue saying the board didn’t do enough to further such benefit so long as management’s decisions are informed and disinterested and are not so unfounded “such that no person of ordinary, sound judgment would approve”.
In addition, the Certificate of Formation for a public benefit LLC can provide that management shall not be found to have acted in bad faith or in breaching the duty of loyalty if a failure to properly balance permitted considerations was “disinterested” (e.g., no actual conflicts giving incentive to favor one prong of balance or another).
Public Benefit Report
Further, a public benefit LLC must provide a report to shareholders on no less than a biennial basis (meaning every two years) that describes the public benefit LLC’s endeavors to achieve its public benefit purpose as well as the manner in which it has considered the interests of those materially affected by the public benefit LLC’s conduct.
This is the standard corporation for which Delaware is so well known. The Delaware corporation is a frequently chosen for start-up companies that anticipate rapid growth, accepting multiple rounds of financing from venture capital investors and, potentially later,
private equity investors, and ultimately going public or selling the company to a strategic buyer. The general corporation form is less flexible than the contract-based LLC; corporate law terms govern the affairs of a corporation with only a limited ability to modify and customize its requirements.
Management - The Board and Corporate Officers
A corporation is managed by its board of directors which are elected by shareholders (or appointed by shareholders holding specific rights to do so, such as key investors). The board is responsible for significant decisions, setting the direction and strategy of the corporation, overseeing the
officers the board appoints to manage the corporation on a day-to-day basis, and making decisions on key transactions (new lines of business, significant strategic changes, and important transactions such as mergers, asset sales, and joint ventures, among other things). As noted, a corporation is managed on a day-to-day basis by officers (e.g., the CEO, CFO, Secretary, etc.).
Officers and directors have a fiduciary duty to the corporation and the shareholders which includes of a duty of care (acting with appropriate care and attention) and a duty of loyalty (acting in the best interest of the company, avoiding conflicts of interest or disclosing and addressing them, not taking opportunities suitable for the corporation (with certain exceptions)). Delaware law allows a corporation to provide that directors will not be liable for monetary damages for violations of the duty of care, but liability for
violations of the duty of loyalty cannot be waived.
Benefits of Corporate Case Law
A key advantage of forming a corporation in Delaware is the enormous and highly sophisticated body of case law promulgated by an experienced and knowledgeable judiciary. Much of this case law has been developed by
Delaware’s Chancery Court, a court specifically formed to address corporate law cases, among certain other things. These cases give officers and directors insight on satisfying their fiduciary duties under a wide range of circumstances, the standards by which conduct will be reviewed by a court, the criteria for shareholder suits and suits against management on the corporation’s behalf (derivative lawsuits), and the rights and obligations of management and shareholders in general and relative to one another, among a wide range of other things. This body of case law provides predictability that allows corporate boards and officers to plan and manage the corporation based on case precedent and to more accurately assess potential liability for their decisions and decision-making processes.
Capitalization and Share Classes
A
corporation issues shares of stock to its shareholders, which can include different classes of stock with different rights, privileges and obligations. Common stock generally has one vote per share and few additional rights. Often, large investors in “venture capital” fund raising will purchase
preferred stock or convertible instruments giving them stock with superior rights over common stock, such as the right to (1) appoint directors or appoint a board observer, (2) exercise veto rights over certain key transactions, (3) exercise a greater number of votes per share than the corporation’s common stock, (4) elect to participate in subsequent rounds of financing in order to maintain or increase its percentage ownership, (5) change the terms governing its shares and its investment to mirror any better terms given to other investors (a most-favored-nations clause), (6) receive distributions of cash prior to distributions to holders of common shares, and/or (7) obtain a higher share value in the event of a merger, acquisition, or asset sale.
Entity Level Taxation (C-Corp) and Pass-Through Election (S-Corp)
A corporation is generally taxed as an entity level, meaning the corporation pays tax on its income at corporate tax rates and shareholders also pay tax on distributions from the corporation at the favorable dividend rate or the capital gains rate. Where a corporation is taxed as an entity, it is referred to as a “C-Corporation.”
However, a corporation can structure itself in a way such that the IRS will tax it as a pass-through entity, such as a limited partnership or LLC. Where a corporation has structured itself and done the foregoing, it is referred to as an “S-Corporation” referring to the section of the tax code providing for this tax treatment. If a corporation intends to elect S-Corporation status, it must structure its ownership and other terms to satisfy certain requirements (discussed below). Its shareholders will each be taxed on their distributive share of gains or losses, regardless of whether such amounts are actually distributed (referred to as “phantom income”).
Veil Piercing
If shareholders do not respect the corporate form as separate from him or herself, a court may “pierce the corporate veil” in the event of a lawsuit. When this occurs, the shareholders become personally liable for the debts and obligations and find that the shareholders are personally liable for the debts and liabilities of the corporation. Respecting the separateness of the corporate form involves maintaining proper corporate records, abiding by formalities of issuing resolutions, complying with the corporation’s governing documents, and not treating the corporation’s assets as those of the shareholder(s).
S-Corp vs. C-Corp
C-Corporation
A C-Corporation refers to the tax status of a general corporation, and is not a separate type of corporation. A C-Corporation is taxed on at corporate tax rates, and shareholders are taxed on distributions made by the corporation. This is frequently referred to as “double taxation”, although it the general rule for corporations and is not so actively avoided as this reference would imply. C-Corporation status is the default taxation for general corporations.
S-Corporation
An S-Corporation is simply a general corporation which abides by certain requirements and has elected for pass-through treatment under Subchapter S of Chapter 1 of the Internal Revenue Code. An S-Corp is used when founders of a company want the corporate form, structure, and body of law to govern its operations, activities, and inner workings, but want to avoid the “double taxation” that occurs with a C-Corporation, meaning a tax on the corporation’s income at corporate rates and a subsequent tax on distributions made by the corporation to shareholders (generally at favorable dividend tax rates).
In order to elect S-Corporation status, the following must be true with respect to the corporation: (1) all of the shareholders are natural persons and not entities, (2) all of the shareholders are U.S. citizens or U.S. resident aliens, (3) each shareholder must consent to the corporation electing S-Corporation status, (4) the corporation must have fewer than 100 shareholders, and (5) the corporation must issue only one class of stock with all shareholders having identical rights to distributions in the course of business and upon the corporations termination. Failing to satisfy any of these requirements can result in the loss of S-Corporation status, which would have significant tax consequences to shareholders and creates significant complexity.
Close Corporation
A close corporation is a special type of corporation meant for a small number of U.S. shareholders, and is most often used for tight-knit, family businesses which do not expect to expand their ownership base or sell their interests or the company as a whole. Close corporations are not widely used.
Certain terms of a close corporation differ from those of a general corporation. A close corporation can have only 30 shareholders, all of which must be U.S. residents, and can restrict the sale of its stock (generally by giving each shareholder a right of first refusal over another shareholder’s sales). Generally, a close corporation is taxed as a C-Corporation (at the entity level), unless it elects to be treated, and meets the requirements for treatment, as an S-Corporation with pass-through tax treatment.
Non-Stock Company
A non-stock corporation in Delaware is primarily selected to form non-profit, tax-exempt entities, particularly those applying for such status under Section 501(c) of the Internal Revenue Code (which includes the most popular non-profit election under Section 501(c)(3), among others). The non-stock company form is designed to satisfy requirements of the Internal Revenue Code for non-profit status, and to facilitate an application for tax-exempt, non-profit status after the company’s formation. A Delaware non-stock corporation does not issue capital stock and, therefore, it has no shareholders. Instead, it has members, which can have different rights and can be voting or non-voting members. A non-stock corporation is generally managed by its board.
Forming a non-stock corporation does not itself provide non-profit or tax-exempt status. A company must apply to the IRS and satisfy applicable requirements of the Internal Revenue Code based on the provision of the Code selected to qualify for such status.
Public Benefit Corporation
The public benefit corporation is a relatively new business form. It functions and is structured like a corporation, and can engage in any type of business and activities permitted for a standard Delaware corporation. However it includes in its Certificate of Incorporation a statement of a specific public benefit that it intends to pursue in addition to its for-profit business activity. Such a public benefit might include, for example, “expanding medical care in underserved areas,” or “improving the ability of inner-city Baltimore residents residing in ‘food deserts’ to obtain nutritious meals and ingredients.”
Management and Public Benefit Features
The management options and general terms of a public benefit corporation are generally the same as those of a corporation.
One of the key differences is that, in managing a public benefit corporation, the directors are able to balance the interests of the environment and society, the entity’s specific “benefit” purpose, and maximizing shareholders’ return without violating their fiduciary duty to the corporation and its shareholders.
Further, directors of a public benefit corporation are not liable to anyone for the public benefit purpose (e.g., no one can sue and claim the director made a decision against the stated public benefit or can sue saying the board didn’t do enough to further such benefit) so long as the board’s decisions are informed and disinterested (e.g., the directors have no conflict of interest) and are not so unfounded “such that no person of ordinary, sound judgment would approve”.
In addition, the Cert of Incorporation of a public benefit company can provide that the board shall not be found to have acted in bad faith or in breaching the duty of loyalty if a failure to properly balance permitted considerations was “disinterested” (e.g., no actual conflicts giving incentive to favor one constituency over another, such as if a business owned by a family member of a director received funds as part of the public benefit expenditures).
Public Benefit Report
Further, a public benefit corporation must provide a report to shareholders on no less than a biennial basis (meaning every two years) that describes the public benefit corporation’s endeavors to achieve its public benefit purpose as well as the manner in which it has considered the interests of those materially affected by the public benefit corporation’s conduct.
Limited Partnership
A limited partnership (or “LP”) provides limited liability to its limited partners, but must be managed by a general partner (which can be a person or itself can be an entity) which has unlimited personal liability for the debt and obligations of the limited partnership. A limited partner cannot participate in management without significant consequences; a limited partner that participates in management is treated as a general partner with unlimited personal liability for the partnership’s debts and obligations. Often a general partner will be structured as an LLC or corporation to ultimately provide the persons responsible for management with limited liability protection.
A limited partnership issues limited partnership interests, which function like LLC membership interests. The value of a limited partnership interest is determined by a limited partner’s capital account.
A key benefit of forming an LP in Delaware is the limited remedies available to a limited partner’s own creditors for debts outside of the LP with respect to the limited partner’s interest. A creditor cannot foreclose on a limited partner’s interest. The creditor’s only recourse is a charging order entered by a court, whereby the creditor can stand in the shoes of the member with respect to economic distributions only, but cannot vote the interest or otherwise exercise rights as a limited partner (including to compel distributions or require the dissolution of the LLC).
A limited partnership is taxed as a pass-through entity, meaning the partnership itself is not taxed but the members must include on their taxes their distributive share of gain and loss, even if amounts were not distributed to them (e.g., “phantom income”).
Limited partnerships are used far less often than they were prior to the adoption and widespread acceptance of the LLC.
Public Benefit LP
The public benefit LP is new as of 2019. It is much like a normal limited partnership but selects a public benefit stated in its Certificate of Limited Partnership which it pursues along with its for-profit purpose and activities. Such a public benefit might include, for example, “expanding medical care in underserved areas,” or “improving the ability of inner-city Baltimore residents residing in ‘food deserts’ to obtain nutritious meals and ingredients.” See the discussion regarding limited partnerships in this section for a more fulsome description such entities and, thus, the public benefit LLC.
The public benefit LLC does have certain special characteristics and requirements, however. For example, the general partner is able to balance the interests of the environment and society, the entity’s specific “benefit” purpose, and maximizing shareholders’ return without violating his or her fiduciary duty to the limited partnership and limited partners.
Further, management of a public benefit limited partnership is not liable to anyone for the public benefit purpose (e.g., no one can sue and claim the general partner made a decision against the stated public benefit or can sue saying the general partner didn’t do enough to further such benefit) so long as the general partner’s decisions are informed and disinterested (e.g., management has no conflict of interest) and are not so unfounded “such that no person of ordinary, sound judgment would approve”.
In addition, the Certificate of Limited Partnership of a public benefit limited partnership can provide that the general partner shall not be found to have acted in bad faith or in breaching the duty of loyalty if a failure to properly balance permitted considerations was “disinterested” (e.g., no actual conflicts giving incentive to favor one constituency over another, such as if a business owned by a family member of a director received funds as part of the public benefit expenditures).
Series Limited Partnership
Delaware law provides that a limited partnership can be divided into series, much like a series LLC (the “Series LP”). The Series LP functions nearly identically to the series LLC, and the same concerns and considerations apply. Please see the description of the series LLC for a fulsome description of the series concept and the advantages and disadvantages of the Series LP form.
Interactive Entity Comparison Table
Please use the menu below to select up to four business types to compare.
Please slide or swipe below table horizontally, to see hidden columns contents.
| |
Sole Proprietorship |
Limited Liability Company (LLC) |
General Corporation |
Limited Partnership |
S-Corporation |
C-Corporation |
| |
Order |
Order |
Order |
Order |
Order |
Order |
| Formation |
No state filing required |
State filing required |
State filing required |
State filing required |
State filing required. Within 75 days of formation, IRS filing of Subchapter S election is required |
State filing required. Within 75 days of formation, Form 2553 required to be filed with the IRS |
| Liability |
Unlimited personal liability; typically liable for the debts of the sole proprietorship |
Typically, members not personally liable for the debts of the LLC |
Typically, shareholders not personally liable for the debts of the corporation |
General partner carries full liability. Limited partners can lose only the amount of their investment |
Typically, shareholders are not personally liable for debts of the corporation |
Typically, shareholders are not personally liable for debts of the corporation |
| Raising Capital |
Contributions often limited to individual's funds |
Potential to sell interests, contingent upon Operating Agreement restrictions |
Shares of stock are usually sold to raise capital |
Limited partners provide capital in exchange for LP Units |
Shares of stock are usually sold to raise capital |
Shares of stock are usually sold to raise capital. Venture capitalists and angel investors are typically a good source of funding |
| Taxation |
Not a separate taxable entity; owners pay all of the taxes |
Not taxed at entity level if properly structured. Profit/loss passed through directly to the members |
Taxed at the entity level and shareholders receiving dividends are taxed at the individual level |
Partnership tax treatment on the federal level |
Not taxed at the entity level. Shareholders are taxed at the individual level for profit/loss |
Fringe benefits and owners' salaries can be deducted as business expenses. Shareholders may face double taxation |
| Formalities |
Minimal legal requirements |
Less formal meetings and minutes are required; state reporting required |
Board of Directors, formal meetings, minutes and annual state reports required |
Formal meetings, minutes and annual state reports required |
Board of Directors, formal meetings, minutes and annual state reports required |
Board of Directors, formal meetings, minutes and annual state reports required |
| Management |
Full control and responsibility of management, operations and day-to-day activities |
Members have an Operating Agreement that outlines management responsibilities |
Shareholders elect Board of Directors to appoint officers for day-to-day management |
General partner fully responsible for management. Limited partners cannot participate in management |
Shareholders elect Board of Directors to appoint officers for day-to-day management |
Shareholders elect Board of Directors to appoint officers for day-to-day management |
| Existence |
Typically ceases doing business upon the death of the sole proprietor |
Perpetual unless otherwise specified |
Perpetual unless otherwise specified |
Perpetual unless otherwise specified in Partnership Agreement |
Perpetual unless otherwise specified |
Perpetual unless otherwise specified |
| Transferability |
Ownership non-transferable |
Contingent upon Operating Agreement restrictions |
Shares of stock are easily transferred |
Contingent upon Partnership Agreement |
Shares of stock easily transferred after observing all IRS regulations and ownership requirements |
Restrictions on transferring shares of stock. |
